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Gamesmith94134: China’s Interest-Rate Challenge
The present china government must take the interest rate liberalization seriously to take charge of the pivotal reforms for its future. They must contemplate on both of the currency valuation and sustainability for the small and medium size business; since the moderate economical growth is the reality on the next years. Chinese policymakers should begin with a careful examination of the effects of current financial repression (the practice of keeping interest rates below the market equilibrium level). In term of the calculation on the failing EU and the emerging market nations, the China’s capital market runs on an inequality mode that balance of payment on the foreign investment that left with a large gap for crediting market since its M2 have grew faster than its development. It all has given a fair warning on the stagflation on its horizon; that the equity market with its bubbles in Hong Kong and metro too, soon as the QE is off.
Why should China follow to repeat? I think the BRICS were short-sighted with price and valuation that the developed nations attempted to use financial repression (the practice of keeping interest rates below the market equilibrium level) to balance its fiscal deficits and high inflation. Currently, they avoided the developed nations using the interest differential and currency exchange advantage that they neglected the intrinsic valuation of its own equitable to adjust its speed on growth. Many have fallen into the entrapment of liquidity. They burn them out with inflation and inequality with profitability since their social stratum development is less flexible with their income compared to capital equity growth even though the pricing is moderately depressed with the financial crisis.
Chinese policymakers should begin with a careful examination of the effects of current financial repression (the practice of keeping interest rates below the market equilibrium level). In China, total public debt currently amounts to roughly 60-70% of GDP – a manageable burden. But, after interest rates are liberalized, the public sector’s debt/GDP ratio is expected to increase substantially. In the hindsight, currency exchange rate might escalate if the RMB is substantively strengthened with the liberalized interest rate, then, china would lose its competitiveness and cut its growth if the domestic market is not catching on with inflation (3-5%).
Perhaps, it is time for the Chinese economists to contemplate the advantages and disadvantages to liberalize its interest rate and inflation; and how china would place itself in the due course of the QE cliff and the fallout of the EU. It would be a gamble if China would raise its interest rate to stop the bleeding on outflow on the foreigner’s investment or cash; but, stability is the key issue to keep equity market from the free fall mode. Besides, there are a vacuum where the retirement fund would hold in the next ten years; raising interest rate would assure to stay. Eventually, I hope these economists can convinced the politicians that repeating the tracking on stimulation would get the same result for irrational exuberance since the process of QE is only extending inequality as income is depressed by unemployment.
Mr. Bannake may think QE could work for unemployment. Liberalized interest rate may not stop invasion of hot cash or stop them from leaving China; but it is the basis of leverage on the RMB that sustain in the international currency reserves. A real economist think of inflation plus 4% risk factor was a yard stick for the real interest rate set for business mode in the short term, what is the long term rate? Negative for politics, for economics, Who know?
May the Buddha bless you?